It was another quarter of torrid growth for Amazon.com Inc. in the three-month period ended June 30, both in sales and profits.
Amazon.com, No. 1 in the 2016 Internet Retailer Top 500, reported today that its net sales in North America increased 28.1% in the second quarter over the same period last year and internationally by 30.1%. An even larger 58.2% jump in revenue from its Amazon Web Services cloud computing unit drove overall revenue growth to 31%.
The big e-retailer was reported record net income of $857 million, versus only $92 million in the second quarter of 2015. It was the fifth consecutive profitable quarter for Amazon, which in the past often reported quarterly losses as it invested heavily in opening new fulfillment centers, licensing movies and TV shows for its Prime Video service and developed new devices.
Amazon plans a big expansion of its fulfillment network in the current quarter to prevent the kind of bottleneck at its distribution centers it faced during the 2015 holiday season, Brian T. Olsavsky, Amazon senior vice president and chief financial officer told analysts in a conference call Thursday after the release of Q2 earnings. He said the fulfillment centers will provide capacity needed to handle the growing demand from the Fulfillment by Amazon service that handles warehousing and fulfillment of orders on behalf of Amazon marketplace sellers.
“We’re opening 18 fulfillment centers this quarter,” Olsavsky said, according to a transcript by SeekingAlpha. “To put that in perspective, we launched six in Q3 of last year. This will bring us up to 21 net FCs for the year by the end of Q3 and that compares with 10 fulfillment centers for the first three quarters of last year on a net basis.
“So, why are we expanding so much? If you remember back to Q4 and the capacity constraints we had in Q4, primarily due to really strong FBA growth, we talked a lot in the Q4 call about the operational cost of that in Q4. Customers well taken care of, but we had additional fulfillment costs from being so tight on capacity.”
He said the growth in units handled by Fulfillment by Amazon is “much higher” than the 28% growth in units sold on Amazon sites during the quarter, though he did not provide details. A big reason, he noted, is that products offered by Amazon marketplace sellers that use FBA become eligible for free shipping to members of Amazon Prime, the popular Amazon shipping and loyalty program. That’s led more merchants to use FBA.
He touted the success of the Prime “flywheel,” using a term favored by Amazon executives to suggest that one service contributes to the success of another. “The low prices, vast selection and convenience continue to resonate with customers,” Olsavsky said. “Prime membership increases and selection through FBA makes Prime more valuable. So it’s a bit as simple as that in the consumer business in North America and international, we are seeing great acceptance of Prime and usage of Prime benefits.
Amazon does not disclose the number of Prime members. But securities research firm Consumer Intelligence Research Partners LLC estimates that 63 million U.S. consumers are members of Prime, 52% of Amazon customers in the United States.
Olsavsky also noted that Prime Now, a service that offers free, 2-hour delivery of a limited selection of items to Prime members, has expanded into Germany, Spain and France. “We’ve added 11 metro areas, bringing the total to 27 metro areas that are qualified for same day,” he said. “We know customers love it.” He also added that the Amazon Fresh grocery delivery program has expanded to Boston and London, the first city outside of the United States to get the service.
Darin Manney, Amazon’s head of investor relations, pointed out that Amazon has been given permission by the United Kingdom for a more extensive test of drones for parcel delivery than the United States government has so far permitted.
“This is providing us with permission to trial new methods in the space, including beyond line-of-sight operation, sense-and-avoid technologies and flights where one person operates multiple drones,” Manney said. “So we definitely appreciate the pragmatic and forward-looking approach on this topic with the U.K. and we’re going to continue to work with regulators and policy makers in many countries, including the U.S.” In the United States, the Federal Aviation Administration only permits the operation of drones for parcel delivery when the operator can see the drone, limiting the distance the airborne device can fly with a package.
For the quarter ended June 30, Amazon reported:
- North American net sales of $17.674 billion, up 28.1% from $13.796 billion in the same period a year ago.
- International net sales of $9.844 billion, an increase of 30.1% from $7.565 billion last year.
- North America sales of books, music and other media of $2.928 billion, an increase of 11.8% over $2.620 billion in Q2 2015. North America sales of electronics and general merchandise increased 31.6% to $14.459 billion from $10.987 billion.
- Internationally, media product sales grew 9.0% to $2.283 billion from $2.094 billion, while electronics and other product sales grew 38.3% to $7.504 billion from $5.425 billion.
- What Amazon calls “service sales,” which includes the commission Amazon takes from sellers on its marketplaces and other items, increased 52.7% year over year to $9.288 billion from $6.081 billion.
- Unit sales grew 28%, slightly faster than the 27% in the first quarter of the year.
- The percentage of unit sales by marketplace sellers on Amazon sites increased to 49% of units sold, from 48% in the first quarter of 2016 and 45% in the second quarter of 2015.
- Worldwide shipping costs increased 44% to $3.362 billion from $2.340 billion. Worldwide shipping revenue, including fees paid for Amazon Prime memberships ($99 a year in the United States) and from marketplace sellers that use Amazon’s Fulfillment by Amazon service, increased 43% to $2.000 billion from $1.399 billion. Net shipping costs increaed 45%.
- Revenue from the Amazon Web Services unit that provides internet-based data storage and computing power to other organizations increased 58.2% to $2.886 billion from $1.824 billion.
- Operating income of $1.285 billion, including $718 million from AWS, $702 million from North American retail and a loss of $135 million from international retail. That means AWS contributed 55.9% of Amazon’s operating income and its retail operations 44.1%.
- Net income of $857 million, a sharp increase from $92 million a year earlier.
For the third quarter, Amazon projects net sales of between $31.0 billion and $33.5 billion, representing growth of between 22% and 32% over the third quarter of 2015.
Amazon’s Q2 results “exceeded expectations,” says Colin Sebastian, an analyst at investment firm Robert W. Baird & Co.
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